I'm starting to look forward to 2016 and wondering how much I should contribute to my employer's 401k.

My monthly expenses are about $1400 and I make about $4,000 gross per month. The amount I net obviously depends on how much I contribute to my 401k. My best guesses (based on state and local tax rates, as well as other payroll deductions like health care and HSA contributions) are as follows:

$500/month to 401k (12.6% of gross): $2,260 net monthly income (thus leaving $860 left over to invest elsewhere).

$1000/month to 401k (25.3% of gross): $1,966 net monthly income (thus leaving $566 left over to invest elsewhere).

(1) I already have an emergency fund of about $11,000, which is about 4 months living expenses for my GF and me. This should be $15,000 after we get Christmas bonuses and tax returns, which gives us a full six month emergency fund.

(2) And obviously there's a lot of different numbers I could plug in (i.e., contribute $750/month, $1250/month, whatever). I guess I'm seeking what the right amount of "buffer" is.

So I can theoretically go all the way to $18,000, but there are two sides to this coin: (a) I like the idea of forced savings and forcing myself to live on $1,700 per month, but (b) that really decreases my liquidity and cash flow.

I think decreasing my contribution to somewhere between $10,000 and $12,500 and contributing to a tIRA at the end of the year (and thus improving cash flow) might be a better idea.

So, what do you think is best? Go for the full $18,000 max or bring that down a little to increase cash flow/liquidity (and then invest in tIRA with funds left over at end of year)?

So the other side of the equation is "cash flow". The reason why you would need cash flow is if you're planning to spend the money (hence the "flow"). But it sounds like you're planning on having money to put into a tIRA at the end of the year - where are those coming from? Why not put those straight into your 401(k)?

It sounds even your highest deferral option leaves you with a healthy spending buffer.

I think you're getting caught up in the terms without thinking what they're for. If you're going to spend the money, then yes, defer less. If you're not, there's no value in accumulating the money now and putting it into a tax-deferred account later. Your liquidity and cash flow is getting you nothing other than delaying putting your money to work and making your accounting more complicated. (All IMO, of course)

I'm going to piggy back on this and say I bumped my contributions up to the max. We'll see how long I can hold out going from $3,000 a year to $18,000. My net pay should be close to what it was before I got all my promotions so we'll see how hard a pay cut hits me.

One question I did have is does the pretax 457b from my full time job and the pretax TSP contribution from my National Guard pay go into the same $18,000 bucket? In other words does maxing out the 457b mean I have to cut the TSP or switch to ROTH TSP?

I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

At an annual salary of $48k, how much you can defer depends a lot on your expenses. I think for the first year I would start out with $15,000 going into the 401(k). Every month at the end of the month, if I had not found a more compelling use for the $250 difference, that would go into the IRA. At the end of six months, I would re-evaluate. If I was able to live on the net, I would up the 401(k) to $1,500 a month. All other savings would go to the IRA.

If you find yourself with a raise or a bonus, I would direct that money into one of the tax deferred pots of money as well. In your shoes, I would put this year's bonus into the IRA, as you have a solid emergency fund already.

So the other side of the equation is "cash flow". The reason why you would need cash flow is if you're planning to spend the money (hence the "flow"). But it sounds like you're planning on having money to put into a tIRA at the end of the year - where are those coming from? Why not put those straight into your 401(k)?

It sounds even your highest deferral option leaves you with a healthy spending buffer.

I think you're getting caught up in the terms without thinking what they're for. If you're going to spend the money, then yes, defer less. If you're not, there's no value in accumulating the money now and putting it into a tax-deferred account later. Your liquidity and cash flow is getting you nothing other than delaying putting your money to work and making your accounting more complicated. (All IMO, of course)

I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

Why max out the 401 k first? Max out the IRA first. You have more investing flexibility. Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.

My 401k is through Fidelity and has total stock market index funds with .07% expense ratios. I can't quite track where the other fees might be, but I like the idea of forced saving into the 401k and I'd be investing in the same fund in my tIRA anyway.

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

Why max out the 401 k first? Max out the IRA first. You have more investing flexibility. Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.

Not always true. Actually not at all true in terms of legal protections (401k is better), so only true if the funds in the 401k aren't good.

You're right, didn't know about the deduction. As I've posted in another thread, I'm also interested in earning some sort of side income, so if that works out, then I'd definitely would take the above poster's advice and try to max the tIRA as well.

The savers credit is a bit of a balancing act in terms of staying below the limits. That said, always best not to let the tax tail wag the income dog (increase income when you can and deal with the tax consequences that brings up).

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:

max 401k + IRA

401k only

$15000 to 401k

line 22 (total income)

30000

30000

33000

line 32 (IRA contribution)

5500

0

0

line 37/38 (AGI)

24500

30000

33000

line 40 (standard deduction

6200

6200

6200

line 42 (exemptions)

3950

3950

3950

line 43 (taxable income)

14350

19850

22850

line 44 (tax)

1695

2528

2970

line 51 (Saver's Credit)

200

200

0

line 63 (net tax)

1495

2328

2770

difference vs. $15K case

-1275

-442

0

8880:

line 3 (contributions)

23500

18000

15000

line 6 (limit)

2000

2000

2000

line 8 (AGI)

24500

30000

33000

line 9 (multiplier)

0.1

0.1

0

line 12 (credit)

200

200

0

This is why I pay an accountant $100 per year. Thanks for trying to help!

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:

max 401k + IRA

401k only

$15000 to 401k

line 22 (total income)

30000

30000

33000

line 32 (IRA contribution)

5500

0

0

line 37/38 (AGI)

24500

30000

33000

line 40 (standard deduction

6200

6200

6200

line 42 (exemptions)

3950

3950

3950

line 43 (taxable income)

14350

19850

22850

line 44 (tax)

1695

2528

2970

line 51 (Saver's Credit)

200

200

0

line 63 (net tax)

1495

2328

2770

difference vs. $15K case

-1275

-442

0

8880:

line 3 (contributions)

23500

18000

15000

line 6 (limit)

2000

2000

2000

line 8 (AGI)

24500

30000

33000

line 9 (multiplier)

0.1

0.1

0

line 12 (credit)

200

200

0

A traditional IRA would lower their AGI, no? Some trade-offs there obviously.

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:

max 401k + IRA

401k only

$15000 to 401k

line 22 (total income)

30000

30000

33000

line 32 (IRA contribution)

5500

0

0

line 37/38 (AGI)

24500

30000

33000

line 40 (standard deduction

6200

6200

6200

line 42 (exemptions)

3950

3950

3950

line 43 (taxable income)

14350

19850

22850

line 44 (tax)

1695

2528

2970

line 51 (Saver's Credit)

200

200

0

line 63 (net tax)

1495

2328

2770

difference vs. $15K case

-1275

-442

0

8880:

line 3 (contributions)

23500

18000

15000

line 6 (limit)

2000

2000

2000

line 8 (AGI)

24500

30000

33000

line 9 (multiplier)

0.1

0.1

0

line 12 (credit)

200

200

0

A traditional IRA would lower their AGI, no? Some trade-offs there obviously.

That's what line 1040 line 32 already shows. (The 401k deduction lowers AGI too, but it's already subtracted out from the "wages, salary and tips" box on the W-2. If you swapped the $18000 401k / $0 tIRA option (the column labeled "401k only") for a $12500 401k / $5500 tIRA option in my calculations above, 1040 line 32 would go up by $5500 but so would line 22, so the changes would cancel out and the rest of the lines would stay the same.)

This is really interesting to me as I'm also trying to figure this out for next year (but on a slightly lower but mostly similar salary.)

The Saver's Credit doesn't make a ton of sense to me: if I save $18,000 and get my AGI from $39,500 to $21500, that appears to still put me in the same category (10%). Can someone help me out with understanding it?

Edit: OHHHH so the Saver's credit is after your standard deduction - which means that I'd be in the 50% category after $21500-$6200. Now this is making sense!

Hey, I was just doing a quick calculation for a forum post. If I were actually filling out taxes I'd have double-checked my math the first time.

Definitely wasn't trying to insult you. Was just saying that you ran the numbers and I still had no idea what all of them meant, which is why I pay an accountant to figure it all out haha.

Well yeah, you have to go look at IRS forms 1040 and 8880 (and perhaps read the instructions for each). You could probably do it with the simpler 1040A or maybe even 1040EZ, but the line numbers would be different.

It's actually not hard once you've tried it a couple of times and gotten used to it.

This is really interesting to me as I'm also trying to figure this out for next year (but on a slightly lower but mostly similar salary.)

The Saver's Credit doesn't make a ton of sense to me: if I save $18,000 and get my AGI from $39,500 to $21500, that appears to still put me in the same category (10%). Can someone help me out with understanding it?

Edit: OHHHH so the Saver's credit is after your standard deduction - which means that I'd be in the 50% category after $21500-$6200. Now this is making sense!

No, the Saver's Credit is based on your AGI, which is calculated before you take the standard deduction.

However, if your AGI is $39500, your gross income is higher than ReadySetMillionaire's, not "slightly lower." That makes me think you might be confused, so I'll explain:

ReadySetMillionaire said his gross salary is $4000/month. $4k * 12 = $48000/year. 401k contributions are deducted directly from gross salary before it's even shown on the W-2, so if he contributed $18000 to the 401k then his W-2 salary (and 1040 line 7) would be $30000.

Similarly, if your $39500 figure is really your AGI, and you're also maxing your 401k (and everything on 1040 lines 8 through 21 are $0), that means your gross wages are $9500 higher than his. On the other hand, if you misspoke and $39500 is really your gross wages, and you're still also maxing your 401k, then your 1040 line 7 would be $21500.

If the latter case is correct -- that your W-2 salary / 1040 line 7 is $21500 -- then maxing a traditional IRA would make your AGI $16000, which means you really would be into the 50% Saver's Credit range.

Hey, I was just doing a quick calculation for a forum post. If I were actually filling out taxes I'd have double-checked my math the first time.

Definitely wasn't trying to insult you. Was just saying that you ran the numbers and I still had no idea what all of them meant, which is why I pay an accountant to figure it all out haha.

Well yeah, you have to go look at IRS forms 1040 and 8880 (and perhaps read the instructions for each). You could probably do it with the simpler 1040A or maybe even 1040EZ, but the line numbers would be different.

It's actually not hard once you've tried it a couple of times and gotten used to it.

This is really interesting to me as I'm also trying to figure this out for next year (but on a slightly lower but mostly similar salary.)

The Saver's Credit doesn't make a ton of sense to me: if I save $18,000 and get my AGI from $39,500 to $21500, that appears to still put me in the same category (10%). Can someone help me out with understanding it?

Edit: OHHHH so the Saver's credit is after your standard deduction - which means that I'd be in the 50% category after $21500-$6200. Now this is making sense!

No, the Saver's Credit is based on your AGI, which is calculated before you take the standard deduction.

However, if your AGI is $39500, your gross income is higher than ReadySetMillionaire's, not "slightly lower." That makes me think you might be confused, so I'll explain:

ReadySetMillionaire said his gross salary is $4000/month. $4k * 12 = $48000/year. 401k contributions are deducted directly from gross salary before it's even shown on the W-2, so if he contributed $18000 to the 401k then his W-2 salary (and 1040 line 7) would be $30000.

Similarly, if your $39500 figure is really your AGI, and you're also maxing your 401k (and everything on 1040 lines 8 through 21 are $0), that means your gross wages are $9500 higher than his. On the other hand, if you misspoke and $39500 is really your gross wages, and you're still also maxing your 401k, then your 1040 line 7 would be $21500.

If the latter case is correct -- that your W-2 salary / 1040 line 7 is $21500 -- then maxing a traditional IRA would make your AGI $16000, which means you really would be into the 50% Saver's Credit range.

Thanks, that made sense. I misspoke using AGI to mean gross. I make $39500 gross.

So the latter case is correct. Right now I make $39500 gross and only put 12% into my 401K and then $5500 into a Roth. I don't qualify for the saver's credit at all now. I also have $960 in pre-tax deductions for medical.

I'm running the numbers from moving up to 45% in my 401K + $5500 in the roth, I believe will put me in the 50% category giving me $1000 back. (I also pay 9.5% state tax but I don't thiiink that matters.)

You are planning on having a $15,000 emergency fund. Unless your company restricts you with regards to contribution changes I would set your contributions at the beginning of the year to hit the max and then if something happens you can use the emergency fund and adjust your contributions to increase your cash flow/replenish the emergency fund.

You are planning on having a $15,000 emergency fund. Unless your company restricts you with regards to contribution changes I would set your contributions at the beginning of the year to hit the max and then if something happens you can use the emergency fund and adjust your contributions to increase your cash flow/replenish the emergency fund.

Ya, that's what I'm thinking about doing. When I wasn't eligible for contributions I was netting something like $2,640 per month. That would immediately increase cash flow by about $1,000, which should take care of mostly everything minus a significant emergency. And that's what the emergency fund is for.

Good point to consider the saver's credit. TaxCaster, however, does not consider it. A full blown version of TurboTax, TaxAct, etc. will. Also the MMM case study spreadsheet will do the saver's credit.

I can relate to your situation RSM.I gross about $55,000, which under normal circumstances would be plenty to comfortably max my 401k. But I'm also looking to potentially buy a house in the next 18-24 months (with my gf), as well as the potential of proposing at some point in the near-intermediate term (been dating 3.5 years). Have ran the numbers, and should be able to swing maxing while saving for the other two life events, but is definitely going to be tight.

Based on the details you've provided and assuming no major life events in your immediate future, you should be able to comfortably max your 401k without issue.

I'm actually trying to keep AGI low to keep my student loan payments in check. With that in mind, would you still recommend contributing to a Roth?

No comment on the student loan payment issue - I just haven't explored that issue enough to say.

The reason for part traditional 401k and part Roth IRA is that, in the 15% federal + whatever state tax bracket, you are in between the 25% and 10% boundaries in the "usual rules of thumb" (see below). There is actually a good chance that "some of each" is in fact the right thing for you, thus the suggestion. See links below for more details.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct. Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

WHAT 0. Establish an emergency fund to your satisfaction 1. Contribute to 401k up to any company match 2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. 3. Max HSA 4. Max Traditional IRA or Roth (or backdoor Roth) based on income level 5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5) 6. Fund mega backdoor Roth if applicable 7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. 8. Invest in a taxable account with any extra.